信達思 (CTAS) 2005 Q1 法說會逐字稿

Please stand by.

Good day, ladies and gentlemen and welcome to the Cintas first quarter results conference call.

Today's conference is being recorded.

Now, at this time, I will turn today's conference all over to Mr. Bill Gale, Vice President of Finance and Chief Financial Officer.

Mr. Gale, please go ahead, sir.

Good evening and welcome to our call and glad that you all were able to join us.

With me this evening is Karen Carnahan, our Vice President and Treasurer.

We're pleased to announce that revenue increased approximately 10% to $746 million and profits increased 15%, to $72.7 million.

Our rental business grew at a rate of 8%.

When we factor in the additional workday that occurred in this quarter, versus last year, and exclude acquisitions, growth in our rental division was 6%, other service revenues which consists of the direct sale of uniforms, first-aid services, and the sale of safety products increased 18%.

Of which internal growth was 5% after adjusting for the additional workday and acquisitions.

Earnings per share grew approximately 14% to 42 cents per diluted share.

Gross margins improved to 42.7% in the current quarter versus 42.4% last year, despite increased energy and medical costs.

Improved utilization in our facilities, coupled with ongoing productivity improvements continued to occur.

SG&A costs increased to 26.7% of sales, versus 26% of sales in the first quarter last year, due primarily to the increase in selling expenses, as we continued to add to our sales force, and increase advertising programs.

As we have stated previously, our SG&A costs, as a percent of sales, tend to be at their highest level in the first quarter, and then typically decline as the year progresses.

Our current guidance of revenues and earnings per share for the fiscal year ending May 31, 2005, remains unchanged, and calls for total revenues of 3.0 to $3.2 billion and diluted earnings per share of $1.70 to $1.80.

This guidance continues to assume an improving economy throughout our fiscal year.

We have begun to see some positive signs of improved economic activity with our customers.

While I would not yet call the economy robust, I do believe that the employment picture is beginning to improve in our customer and prospect base.

Karen will share with you shortly our components of internal growth.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor from civil litigation for forward-looking statements.

This conference call contains forward-looking statements that reflect the Company's current views as to future events and financial performance.

These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those we may discuss.

I refer you to the discussion on these points contained in our most recent filings with the SEC.

I will now turn the call over to Karen who will discuss this quarter's results in more detail.

We will then be happy to answer your questions.

Good evening.

I would now like to take you through our income statement, cash flow statement, and balance sheet in a little more detail.

We have updated our Web site with our first quarter financial results.

You may want to go to that section of our Web site and have the financial statements in front of you as I explain those numbers.

When when you pull up the first quarter news release the first two pages will be the announcement itself and the last three pages will be the income statement, the cash flow, and the balance sheet.

I will first start by commenting on the income statement.

Total revenues were 746 million for the quarter, a 10% increase over that reported in the prior year.

Rental revenues were 582 million, compared to 538 million last year.

This was an increase of 8% over the first quarter of last fiscal year.

This first quarter had one extra workday compared to the first quarter of last year, or, in other words, we had 66 workdays this quarter versus 65 workdays last year.

In addition, during the quarter, acquisitions contributed a modest $3 million of rental revenue.

When subtracting out the extra workday and the acquired revenue, our organic growth for the first quarter was approximately 6%.

Let me go into some further detail on sales performance for the rental side of the business for the quarter.

Our new business, which has been booked over the past four quarters contributed 13% growth in our top line rental revenue this quarter versus the quarter a year ago.

This rate of growth is comparable to that experienced throughout fiscal 2004.

We have talked a lot about the changes we have made to our sales force over the past several months.

Our sales force has increased 10% year-over-year.

By the end of this first quarter, we saw some healthy increases in the amount of new business written, as a result of improvements in the productivity of this newer sales force.

We expect these improvements to show up in top line growth, over the remainder of this fiscal year.

Price increases to our existing customers contributed approximately 1% in growth during the quarter.

The measure of business we do with our existing customers known as add-ons and stop orders reduced top line growth by approximately .8 of 1%.

This metric has been as high as negative 3% in 2002, and has slowly improved primarily as a result of our success in cross selling additional rental products to our customers.

In the facilities services area, which is primarily our entrance mats other dust control type products, our shop towels and various other facility services products, the ad/stop statistic has been a positive metric for many months and totally exceeds any shrinkage we have seen in our uniform accounts as customers have tiered back their employment.

However, for the quarter stop orders still exceeded add-ons for uniform accounts, but the trend continues to improve.

One additional comment is that for our entire rental business, add-ons exceeded stop orders for 11 out of 13 weeks.

In the first quarter of last year, add-ons exceeded stop orders in only 7 of the 13 weeks.

We remain very bullish about our ancillary rental services and expect them to continue to contribute nicely to our growth going forward and we are cautiously optimistic as Bill said that the uniform business will start contributing to growth within our existing customer accounts.

The last component of our organic growth rate is the amount of loss business.

The amount of business lost over the past 12 months clipped our top line growth by approximately 7.4%.

We continue to see improvement in our loss business numbers, as we get further beyond the Omni integration, and as a healthier economy takes hold.

So to reconcile our organic growth for this quarter, it can being broken down as follows: new business caused our top line to grow by 13%; price increases added 1%; lost business subtracted 7.4% from our growth; and add/stops took off another .8 of 1%.

Now we would like to move on to discuss our other services revenue.

Other services revenue of $164 million increased 18% from last year.

On an organic basis this segment of our business increased 4.7%, without the benefit of acquisitions and the extra workday.

Our uniform sales business from our national account sales division, and our catalog division in total grew 2.7%, on an organic basis.

This area of our business, although growing, is still not seeing any measurable signs of acceleration.

National account-type customers are still not purchasing new uniforms as as we thought they would post-September 11.

National accounts are also very competitive from a pricing standpoint.

Within this segment, the first-aid and safety business grew 10% on an organic basis year-over-year this compares very favorably to an 8% organic growth rate.

We have been very successful in adding additional products and services in this segment of our business.

Just like our core uniform business, we have the ability to leverage our delivery systems and customer relationships to satisfy their needs in the safety and the first-aid area.

Now, addressing the margins.

Our rental margins were 45.4%.

This is 80 basis points better than the first quarter of last fiscal year.

As expected, the margin improvement reflects the productivity improvements in many of our operations, especially those that absorbed business from the Omni acquisition.

Material costs decreased by approximately 50 basis points, as a percentage of sales compared to last year.

Last year, our material costs increased due to the conversion of Omni's product line over to ours.

Those costs are now predominantly behind us.

Energy costs have increased moderately.

In total our electricity, fuel, and gas costs increased approximately 20 basis points, as a percentage of revenue from the first quarter of last fiscal year.

The gross margin in our other services revenue was 33.4%, a decline of 50 basis points from last year's first quarter.

Other services revenue is primarily derived from the sale of uniforms and our national accounts sales division.

This margin, generally falls in the 30 to 35% range, but fluctuates from quarter to quarter due to the change in customer mix each quarter and the amount of sales volume in the particular quarter.

We have applied many Six Sigma initiatives to leverage our fixed costs more effectively in this segment and we expect the gross margins to stay within this range of 30 to 35%.

Our selling and administrative expenses were 26.7% of revenue or 70 basis points higher than last year's first quarter.

As we commented earlier, we have increased the size of our sales force by approximately 10%.

And increased our marketing and sales promotions in order to accelerate our top line growth.

Medical costs also account for a portion of the selling and administrative expense increase, but the sales costs primarily explain the increase in this line item.

Net interest costs were .6 of 1% of revenue, down 30 basis points from last year and reflective of the lower debt levels this year as a result of paying down the debt from our acquisitions.

Our effective tax rate was 37% for the quarter, comparable to last year.

For the quarter, net income of 72.7 million increased 15%, over last year's first quarter.

And earnings per share increased 14% to 42 cents per diluted share.

Now going on to address the balance sheet.

The balance sheet is very strong.

Accounts receivable balances are in good shape with DSOs equivalent to last quarter at 36 days.

Inventory levels decreased 17% compared to last August but slightly increased by 1%, compared to the fourth quarter.

Other assets decreased 25% from the past year, due to a decrease in the cash surrender value of life insurance policies and a reduction in the market-to-market value of the interest rate swap.

This latter change had a corresponding decrease to our debt.

Accrued liabilities increased $20 million or 26% year-over-year, due to an increase in our general insurance and medical insurance accruals and two extra workdays in our wage accrual.

The wage accrual is determined based on what day of the week the quarter ends versus our pay date, which falls on Friday.

Our debt-to-cap stands at 20%, compared to 25% last August.

This reflects the continued strength in cash flow from operations.

Now, I'm going to go over to the cash flow statement in a little further detail.

Capital expenditures for the quarter were approximately $35 million.

In fiscal 2005, we expect our capital expenditures to be between 140 and $160 million, as we expect to build approximately seven new uniform rental facilities.

In the first quarter, we always prefund our medical benefits trust and you will note that this funding is represented in the cash flow statement line item in the accrued liabilities change.

This allows our Company to take a tax deduction at the beginning of the year, for the expected medical cost we estimate will be incurred throughout the course of the year.

In conclusion, our business is on solid ground.

We expect continued improvement in our growth throughout fiscal year 2005, as employment levels improve, and as we add more salespeople to our sales force, and improve their productivity at the same time.

Now, we would like to open the call to answer your questions.

Thank you very much, our question and answer session will be conducted electronically.

If you do have a question or comment at this time, we do ask that you please press star followed by the digit one on your touch-tone telephone at this time.

Once again that is star followed by the digit one on your touch-tone telephone at this time.

We'll take your questions in the order that we do receive them and we will take as many questions as time permits.

We do ask those participants who are using speaker phones to please make sure that their mute function is turned off so that your signal can reach our equipment.

Our first question today will come from Greg Cappelli from Credit Suisse First Boston.

Hi, guys.

It's Greg and Adam here.

Hi.

Wondering if you could maybe -- Bill, I thought your comments were interesting on the seeing signs of improvement within various clients.

Wondering if you could elaborate on that a little bit more to begin with.

Well, I think the stories that we're hearing and some of the numbers we're seeing would indicate that many of our customers, of which we have well over 500,000, but many of our customers seem to be stabilizing their work forces, and, in fact, I've seen and heard of some situations where we're starting to see an increase in their work forces.

So as we suspected, you know when we entered this fiscal year, we thought that there would be a stabilization of our customer base, and I would say that based on the results we saw in August, that is happening.

Now, July was not good but fortunately August showed some positive signs.

And, Bill, when you think about add/stops throughout the quarter, was it -- was it more difficult in July -- you know, just July or can you give us an idea of how it trended through the quarter?

Yeah, it actually was the -- it was difficult in July, and then it seemed to get better towards the first part of August and kind of continued steadily through August.

Okay and I'm assuming that goes for so far in the quarter as well?

So far I don't have enough data to even -- you know we've only had one week, so it's really -- I wouldn't be able to even tell you what's going on yet.

Okay.

And then just in terms of your comment on the productivity of the sales force, it sounds like things are -- are improving there, from what you had seen previously.

What would you expect -- I'm sorry if I missed this, in terms of headcount or percentage wise, what would you -- what would you look to expand the sales force from its current size this year?

Well, I think our expectation is is that we will grow our sales force in low double digits from where we ended the sales force levels at the end of last year.

So it will grow throughout the year, in low double digit areas.

Okay.

And just two more quick ones on the national account side that you talked about, is this -- you mentioned pricing, which makes sense in the national account side.

Is this the only area where you're still seeing, you know -- or I should say seeing the most difficulty in pricing or, you know, is it showing up in other areas as well.

Obviously you are getting some pricing somewhere.

I'd say that the worst area for us is the national account, direct sale business.

Not the national rental business but the direct sale business still seems to have a sluggishness with it, both in terms of demand, as well as in terms of price.

Okay.

Final question on the operating margin.

I know you have talked about this before and you have been able to show some nice improvement.

For this to continue to trend in the right direction, I'm just curious, if we do get a pickup in incremental growth here, you know, and the environment continues to a little bit better, how should we look at the -- I guess the increased amortization you would start to have from newer uniforms that would come in the system?

So if we got two or three percentage more, you know, in incremental growth, than you had previously thought, how would that begin to impact the margin here?

Well, what I would expect to happen is, you know, if it's new business growth, and you're right, that's going to increase the amortization cost because we'll have more garments going into service; however, you know, with an improving economy, we're also hoping to see additional products and services being offered to our existing customers through their increase in employment or their willingness to take on some other things that we're offering.

And that is very profitable business.

Because you're taking advantage of that infrastructure that you already have in place, going to those customers anyway.

So my expectation would be that unless we have a dramatic increase in new business, that would have some margin pressure, we should begin to -- we should see kind of an offsetting thing from additional profitability, from existing customers, offsetting the additional cost of new customers, such that the margins that you are seeing today should stay relatively the same.

Okay.

Thanks a lot.

Appreciate the answers.

Our next question will come from Gary Bisbee with Lehman Brothers.

Hi, guys.

A couple of quick questions.

The last few quarters you have been talking about price increases in the 5 to 6% range, off of what had been the bottom throughout 2002.

Now that you have lapped those numbers what kind of price increases in the rental business on new sales are you able to get today and are you thinking about for fiscal '05?

Gary, I looked at that the other day, and the prices we're charging for new accounts today compared to this time last year, is up about 2 to 3%.

Okay.

Great.

The -- I noticed just in looking at your 10-K, you lease about half your facilities and own about half.

Can you give us -- give me any sense as to, you know, is that a certain type of facility that you'd rather own versus lease and are there any major cost differences in -- either operating costs or CapEx to build out a leased facility versus owned.

Yeah.

By and large, what we do is we lease what we call branches, because a branch is not a full fledged processing facility.

We do not have washers and dryers there because the volume at a branch is typically small -- too small to justify the building of a full fledged facility.

But our expectation is that when we open a branch, it is going to -- the volume in that facility and that area is going to continue to grow, and once we get to the point where we feel like we have enough volume to justify a facility then we will build a facility and we own virtually all of our full fledged processing facilities.

So branches are an interim step between the time we enter a market, until we are able to justify the existence of a new facility and that -- at that time we wanted to own it because of all the infrastructure that goes into the facility with piping and the equipment and the pits and the other things associated with a laundry.

Okay.

Thanks and then just one last one, can you explain, again, exactly why we have seen seasonally the last couple of years a big sequential drop in the accrued liabilities.

Yes that is a phenomena that happens every first quarter and we prepay into a trust our estimated medical benefits costs for the entire year.

So we actually fund that ahead of schedule and we get a tax deduction for that here at the beginning of the year.

We also pay off the partner plan contribution, that is fully accrued as of May 31, and then that is funded into the plan at the end of July.

So that is another reason why accrueds go down in -- or you see that as going out as a cash outflow in the first quarter.

Okay.

And just one last one, the -- can you tell us the number of revenues dollar amount that is acquired in the other services?

Sure.

Line?

Let me grab that real quick.

In the quarter it accounted for approximately $16 million.

Great.

Thanks a lot.

You're welcome.

Before moving on to our next question, just as a reminder to our participants that it is star, one if do you have a question and then if you do find that your question has been answered you may remove yourself from the question queue by pressing the pound key.

We'll go next to Michael Schneider with Robert W Baird.

Hi, Karen.

Hi, Bill.

Hi, Mike.

I'm wondering if you could just drill down a little bit further into the add/stop rate.

I'm a little confused.

It sounds like the cross selling is what's driving at least this quarter's significant improvements in add/stops.

Is that right, Karen?

No, I think Karen said that it also was a -- we didn't have as much a reduction in the garment side either, Michael.

Yeah, the garments are still negative but not to the extent that we have seen over the past -- gosh, you know we go back and look at the data since the early 2002, when it was a negative 3%.

So the garments, the add/stops in uniforms back in that time frame, you know, was significantly negative and what we're seeing is that it's -- the trend is better, but the bottom line is it's still slightly negative.

And last quarter we talked about the benefit -- I'm sorry, the hit of facility service add/stops from mat returns at the end of the school year, winter jacket returns.

Are we now seeing the seasonal benefit of that?

And -- in other words are we -- am I counting too much into the add/stop increase?

We're seeing a partial benefit but not anything what we expect in the fall months.

We're just now getting into adding back those jackets into service.

And so we'll see that benefit in the second and third quarter.

The entrance mats are effectively back into service once the school season starts.

So we just saw that at the end of the quarter.

Okay.

And then switching to new business growth, up 13%.

I'm curious as to where you think this pig in the python is.

You've hired this new crew of salespeople that went into place, really throughout last fiscal year, but yet new business is really trended down over the last four quarters from 14 to 13% despite the sales force being up.

When does the inflection point come?

And, you know, I think the rule of thumb is that a salesperson really takes six to nine months to be a solid contributor?

Is that really still the case or has something changed.

No, nothing has really changed and if we continue to see the performance that we saw here at the end of the first quarter we have seen the inflection point.

Now here's going to be the issue.

They are generating very healthy new business right now.

But it takes several quarters for that to show up on the top line.

Because one quarter doesn't -- we have four quarters worth of performance that is really reflected on any comparison of a current quarter to a quarter a year ago.

Sure.

So the answer to your question is we are pleased with what we are seeing.

At the end of the quarter it looked very good.

And we think that we have rounded the corner with the productivity issue.

But it will take a while for it to show up on the top line.

Okay.

And in SG&A, your point is well taken that SG&A as a percent peaks in the first quarter, but a number strikes me that SG&A was up just over $9 million sequentially, where revenue was up only $8 million sequentially.

Is that the type of relationship you would ordinarily see or is there something about this quarter's -- this first quarter's SG&A number that might be unusual.

I think the spike in selling costs is unusual.

That was unusually high.

And then as Karen mentioned we had additional medical costs.

Fortunately I think we're beginning to see the increase in medical costs starting to trend down.

It's not -- the increase is not quite as large as it was.

But really, that's -- that's it.

Okay.

And to be clear again, Bill, the SG&A percentage falls through the year now?

It always has.

You know, and I think -- I wouldn't see any reason why it wouldn't, other than if we saw opportunities to even increase selling more because we were creating more margins in our businesses, you know that would be the only reason that that would happen.

And, Bill, if you presented the case -- final question.

Have you presented the case of a share repurchase to the board during the year-end meetings and what was their response.

I can't talk about their response but the board continually evaluates whether or not the Company should repurchase shares, and obviously with the fact we haven't done any, you can tell what their decision has been at this point.

All right.

Thanks, guys.

Morgan Stanley's Chris Stanick has our next question.

Yeah.

Hi, Chris Gutek, Morgan Stanley.

Hi, Bill and Karen.

Hey, Chris.

I hate to beat this dead horse with the sales force productivity, but I have a question I'll ask in a slightly different way.

If the 13% contribution is equal to what Aramark reported in their June quarter.

And as you guys know they have been growing their sales force presumably somewhat faster than revenues have been growing and even the number three competitor G&K services, while their sales force productivity is much lower at about 9.5% they have also increasingly been trying to put more focus on growth going forward.

I'm curious, are you guys seeing any impact of increasing competition in the marketplace.

No, I don't think that we've seen anything of any magnitude.

You know we hear different things that occur in local markets, but nothing on a national scale that's any different than what we've seen in the past.

Okay.

Switching gears on an unrelated question, can you guys comment on the Company's new tag line?

Cintas, the service professionals?

And I guess what I'm getting at, is this starting to -- to send a message to clients that Cintas is going to move far beyond the uniform business and starting to encompass the paper shredding business and maybe some other businesses?

Or is that reading too much into the new tag line?

Well, I -- I would say that -- you may be reading a little bit too much into it, Chris, but one of the things that needs to be understood is that as we have broadened our services into the non-uniform areas, we -- we have picked up a number of customers who no longer utilize uniform services.

And as a result of that, we felt that it was important for us to become the -- identify ourselves as a more broad based service Company; therefore, we made the change from a corporate standpoint to be the service professionals.

Now each one of our segments continues to utilize the uniform people, the first-aid and safety people, et cetera, but the Company in total will be known as the service professionals.

Now, does that mean that we are de-emphasizing uniforms?

No, I think what it really says to everyone is that we have been very successful in our forays into the non-uniform area both in terms of first-aid and safety, in the hygiene services that we're offering now within our rental business, and in -- most recently in the document management business.

We have continued -- as we have continued to say, we are evaluating other possibilities down the road that we may also enter into, which will continue to increase our ability to basically provide potentially a service to every business in North America.

Okay.

That's helpful.

And one quick follow-up.

I noticed in the 10-K.

The Company's exposure to variable interest rates increased due to some swap activity over the course of fiscal 2004.

Given the potential for rising interest rates going forward, would you guys intend to reverse course, remove some of those swaps and maybe incur slightly higher interest rates?

Well, we evaluate that on an ongoing basis.

We have some -- a great banking group that helps us evaluate those derivatives and so, yes, that is a possibility.

But, Chris, one thing that we will -- we will always say is that we're not -- we don't profess to be predictors of interest rates.

And so we are comfortable with a 50/50 mix of variable, versus fixed rate debt and that's exactly where we are today.

So we believe that's a prudent structure and the -- so that probably tells you that we'll probably stay with this mix that we have today.

But, to answer your question, we always evaluate it and we could reverse that trend.

Okay.

Great.

Thank you.

Brandt Sakakeeny with Deutsche Bank has our next question.

Hi.

It's actually Chris Delmonte for Brandt.

What are your latest thoughts on international opportunities at the uniform business?

We are continuing to monitor those opportunities but I would say they're low in our priority list.

We feel that the opportunities we have in North America, both in the uniform business as well as in some of these other businesses that we currently are in, or are studying make our opportunities here so great that anything in -- outside of the North American continent is probably, you know relatively -- you know, it probably will not happen, let me put it that way.

In the near term.

Okay.

And could you remind us of your -- what your full year assumptions are for cash flow from operations and then what your priorities are for using your excess cash?

Yeah, let me answer that -- I didn't communicate that too well last -- the last quarter's call so -- and I've been getting some comments and questions about that.

So if you could just bear with me, I could answer it this way: If you just take the mid point of the range, the guidance we have given the street, for fiscal '05, and which would give you net income of approximately $300 million, our estimate for depreciation, amortization, and deferred charges, you would derive funds from operations for the year of about $475 million.

That's about a 10% increase over the funds from operations in the prior year.

Then if you deduct from that the changes in working capital, which, again, we would assume would be in line with sales growth, or 10%, means that we would increase working capital by somewhere between 45 and $50 million.

So net cash provided by operating activities would put you in a range of somewhere between 425 and $430 million.

Subtracting out CapEx, our guidance today would subtract out about $150 million, and so free cash flow would end up being in the range of somewhere between 275 million, and 280 million.

Now, I know this is down compared to last year but we would remind everybody that we had a tremendous reduction in inventory levels and so we don't expect to repeat that again this year but if you take a look at that free cash flow compared to what we -- where we were in fiscal 2003, it shows a pretty healthy increase of somewhere around 30%.

Now, with regard to the use of cash, I think the first priority that we have will be to utilize it for acquisitions.

And we believe that there will be plenty of opportunities that will present themselves over the course of the next few years to utilize that cash for acquisitions that make sense for our shareholders.

The board has pretty well stuck by a dividend policy that says that we will dividend out about 20% of the prior year's net income, and that -- I don't think we anticipate exceeding that in the near term.

And then I think as Michael Schneider brought up, the board is continually evaluating alternatives of utilizing our cash for stock buybacks if they feel that such an opportunity presents themselves, I think they certainly will do that.

Okay.

And one last question.

Thanks for a lot of detail by the way.

One last question, what is the latest pricing environment, like an acquisitions target?

It's basically unchanged.

Acquisitions today seem to be going for about the same amount that they have for the last few years.

You know, I hesitate to give an amount, because, again, it's driven by the profitability of the company that you are buying, as well as the synergies that you can bring to that company.

But, you know, it -- it -- there doesn't seem to be change dramatically.

I believe that most of -- most people would say, and we -- certainly it's been our experience, that there is -- continues to be a reluctance on the part of sellers to sell their companies at this time.

I think they're waiting for an economic improvement, and I think as the economy improves and their business improves, they'll be more likely to consider a sale and we continue to maintain a very active corporate development group, looking for opportunities to purchase companies, good companies that will provide a good return to our shareholders and we will make those acquisitions as they become available.

Thank you very much.

Next we'll hear from Tony Menachio with Midwest Research.

Good afternoon.

A couple of questions I was hoping you'd give me a little bit of color on.

First of all, any kind of color you provided on the geographic basis in terms of, you know, pricing structure, or strength of sales and things of that nature from, you know, any geographic disparity from what the Company reported for the overall quarter?

And on the other businesses, this document shredding is this an area that provides strong margins in comparison to what corporate margins are currently?

And how would that trend as that business, we would assume, is going to grow?

T hank you.

There are -- as far as looking at where our -- what groups -- you know geographic groups are stronger than others, you know I think it goes really to where our market share is lowest.

For example, in the East Coast, the northeast, I would say our new business there tends to be higher than it does necessarily in our, you know, area that we have the highest market shares like the Midwest.

So, you know -- generally the coasts tend to have a greater opportunity for more business, for more new business than it does in the -- you know in the interior of the country.

As for document management, the opportunities for profitable document management business are very good.

The margins are very positive, we though see opportunities to improve the internal growth and growth as everyone knows is expensive.

So that helps, you know, while we're growing that business, those margins will tend to be utilized somewhat to help fund that growth.

But on a stand alone basis, operating margins of these document management companies are good and we're very pleased with them.

Next we'll hear from Bruce Simpson with William Blair.

Good afternoon.

Hello.

Hi, Bruce!

Following up on your last comments about document management.

How many acquisitions have you performed there?

Where are they located around the country?

And how much capital in total has been dedicated to that business?

Well, Bruce, it's still a relatively small segment and we're not going to discuss any of the details right now for competitive reasons.

We have made several acquisitions, primarily east of the Mississippi, and, you know, many of the -- most of them are very small acquisitions as we develop a presence in different cities within the country.

Okay.

Can you comment at all on the total amount of capital or money that's been allocated to that effort?

No, we're not going to comment at this time.

Okay.

And then the next question, Bill, is sort of more conceptual.

It has to do with operating leverage in general.

You are getting good traction on new business written.

You are beginning to see an improvement in the add/stop and yet now to feed that or maybe retroactively, you are putting a lot of money into sales promotions and so forth.

What do you think about the opportunities for operating leverage as we move through fiscal 2005?

Does it just depend upon whether it's growth at existing accounts versus new business or at the existing level of sales, like no improvement in the add/stop, do you think that as your sales grow, your operating margins have room to improve or do you think we'll kind of stay here below 10% on net income margins?

I think to remind everyone, you know, we try to manage the Company on a net margin basis.

Our stated goal has been, you know, to achieve net margins after tax, between 10 and 11%.

I would say that as long as the economy continues to improve the away we are seeing it improving and as long as we do not see any significant increase in any particular cost element over and above what we have seen, I think there is a very good likelihood that we will be near our stated goal or at our stated goal before this year is out.

Okay.

And I guess the last thing, just quickly, any comments whatsoever on competitive landscape?

Are you seeing anything different in terms of sales activity, acquisition pricing, new account business out of Aramark, G&K, Unifirst or any of your private accounts.

I think as Karen mentioned earlier, Bruce, you know, really there's no -- there doesn't seem to be any general trend.

I think things seem to be rational.

And, you know, I don't -- I can't cite any particular issues.

Thanks a lot, Bill and Karen.

Thank you, Bruce.

Brad Safalow with JP Morgan has our next question.

Hi.

Good evening.

Just to return to the question on working capital.

I guess we had expected you to build inventories maybe a little bit more during the quarter, as we look out through the rest of the year do you expect to build inventories as you have traditionally as, you know, uniform rental demand increases and how should we think about that?

Yeah, again, I think that the best assumption is to grow it at the same pace as sales growth.

So we've used 10% in our modeling.

I understand your point about the quarter, it only going up 1%, but that is -- we believe that a lot of controls have been put in place on adding additional products, controlling the SKUs that we stock.

We did, initiate the Six Sigma effort a couple of years ago and we have seen tremendous benefit from that and I think that's part of the reason why you're going to see it grow at a slower pace but ultimately it should be pretty much in line with sales growth so that's why we've modeled 10%.

Okay and then just -- do you have the non-programmer conversion number for the quarter.

I don't have for the quarter but we did get it for last fiscal year which was 55% -- no, I'm sorry it was 56%.

And just based anecdotally, you don't think that's changed materially for the quarter?

No, I would be shocked if that changed materially because that's how we focused our sales force to go out and call on prospects.

We've got a pretty sophisticated prospect data system, a prospect identification system, we feed them the information in order to make them the most productive they can be on their -- on their sales calls and that focuses a lot on the no programmers.

Okay.

And then just back to the acquisition questioning, what -- where were the acquisitions made, the 14 million plus you made during the quarter.

Was it in the rental side?

Was it on the other services line?

Or was it a mix?

Well, it was predominantly on the other service side.

There was a small number of acquisitions on the rental side, but as I was -- I know that we threw these numbers out sporadically but in the quarter we had -- and, again, this looks back now over the last 12 months of acquisitions that in the current quarter, the acquisitions in the rental group contributed about $3 million, and the other service revenue was about 16 million.

So most of the acquisitions recently have been in the other service revenue segment, which would be in the first-aid and safety business and the document management business.

Okay.

So of the 14 million you spent in the quarter, is it safe to say the mix was relatively similar to the revenue contribution we have seen in the last quarter?

Yes, Brad, I think that's safe to assume.

Okay and then just in general, you guys have talked a lot about the acquisition pipeline, and the use of cash, you know, obviously you're going to have another solid free cash flow year.

Would you guys ever consider a large acquisition in the other services, line items, something outside the uniform rental business?

I would think, Brad, that we would certainly consider a big acquisition, once we are comfortable with that the service that we're going to, you know, make this big acquisition in, you know, meets our long-term objectives and is in the best interest of our shareholders.

So what that says is you're not going to see us go out and all of a sudden buy something that we've never even talked about or seen, because we would never, you know, bet that much on something that we haven't really tested.

But once we have been into a particular business service and we are comfortable that this makes a lot of sense for Cintas, then we certainly could make a big acquisition in that particular business.

Okay.

Great.

I'll turn it over.

Next we'll hear from Craig Halter with LJR Great Lakes Review.

Good afternoon, Bill and Karen.

Hi, Greg.

Hi, Greg.

I wanted to look at the types of price increases you're getting on the new business.

Is it still around that 2 to 4% area?

Yes, when we just look at the average prices we're charging on new accounts today, versus a year ago, its averaging somewhere between 2 and 3%.

Okay.

That receivable that you wrote off, I think it was about a year ago now, any progress made there, or any change?

Unfortunately not.

We're continuing to work on it, but we do not -- we have not made any collections on that.

Okay.

And Karen, I know you made a comment about energy costs up 20 basis points as a percentage of revenues.

Would that mean they are about 2.7% of your revenue in total?

Just lightly under that.

Yes.

Okay.

That is all I have.

Thank You.

Thanks, Greg.

The only question we have left in the queue at this point is a follow-up question from Michael Schneider of Robert W Baird.

Just going back to the new business number, plus 13%.

I'm wondering if some of the reason the productivity hasn't come back as fast as I might have expected is the size of new accounts.

Is it true that new account sizes are still falling, Karen, or have you seen the bottom in that?

Well, Michael, I know that it's certainly true that the size of a new account is less than it was, you know in the last few years.

I think it's too soon to say whether we've seen a change in that.

I think we're going to continue to monitor it.

And you'll need to have a couple of quarters of analyzing our new business before we can really tell you because right now I don't have enough to say that there's been any change.

Have you lowered the threshold for new account sales or is it just that the economy by virtue of taking jobs out of accounts, has lowered the average size?

The latter.

Okay.

Certainly the economy, we haven't changed our focus.

Okay.

And then the SG&A level, Bill, the -- again focusing on the SG&A number and the sales force growth, if you look at the sales force size today, versus, say, 24 months ago, are you flat or up in that number?

Because I know you're up 10% year-over-year but that's really off of the depressed base of last year after the -- culling the sales force, right?

We're still up on an absolute basis on the sales force.

I don't have the number, what -- how much, but going back two years we're still up.

It would be less than the 10% year-over-year, though.

I don't have the number with me.

I can't tell you.

Okay.

Okay.

And then just on an RFID, you've been testing the Milford plant now, I think for over a year.

Can you give us an update there.

Well, a little less than a year.

It is going well.

It is still too early to tell because you've got all of the -- you know the processing that needs to be, you know, funneled through and how many -- you know whether this continues to work.

Of course a lot of the garments are still being fitted with the RFID chip.

So this is a long test.

And -- but I would say our early indications are that we are pleased with what we're seeing.

And we should have a much better report by the end of this fiscal year as to how viable this is to roll out around the country.

And have you allocated money within the CapEx budget to test any other plants this year?

No.

Okay.

And that is all I have.

I appreciate it.

Thank you.

Thanks, Mike.

Bill, Karen, there are no further questions in the question queue at this time.

Well, thank you everyone for joining us and we appreciate your time.

We'll talk to you again here in December.

And that does conclude today's teleconference.

We would like to thank everyone for their participation and wish everyone a good day.

And at this time you may disconnect.